Sneakerhead Accused of Running Huge Air Jordan Ponzi Scheme
Source of Article: Bloomberg
Zadeh Kicks promised the hottest sneakers at discount prices. Buyers say they never got their shoes and are out millions of dollars.
Now, this consummate shoe salesman has been accused by federal authorities of masterminding a Ponzi scheme custom-fit to these strange financial times.
After all the get-rich dramas and market mischief of the pandemic economy – from cryptocurrency to SPACs, to “stonks” and more – it’s come to this: a Bernie Madoff of sneakers.
That, in a nutshell, is how authorities characterize Michael Malekzadeh, of Eugene, Oregon. Prosecutors say Malekzadeh, 39, and his Zadeh Kicks LLC swindled thousands of people across the nation in a multimillion-dollar scam involving nubuck and leather, rather than stocks and bonds.
As portrayed by the feds, the fraud ran for years — and unraveled in months. In the end, Malekzadeh appears to have been undone by the spike in demand during the pandemic, as well as one specific sneaker: the Air Jordan 11 Retro Cool Grey.
More: Sneakerheads Have Turned Jordans and Yeezys Into a Bona Fide Asset Class
After nearly a decade in business, Malekzadeh was charged by federal authorities last week. On Wednesday, he plans to plead not guilty to charges of wire fraud, conspiracy to commit bank fraud and money laundering. He faces as much as 30 years if convicted on the most serious count, conspiracy to commit bank fraud.
“Mr. Malekzadeh is not hiding from his conduct,” his attorney, Joanna Perini-Abbott, said. “He has consistently taken full responsibility for his actions and will continue to do so.”
Whatever the outcome, a Ponzi scheme involving Jordans and Yeezys, of all things, seems made for this moment in more ways than one.
Over the past five years, a confluence of forces – from high fashion to sports culture to online everything -- turned collecting sneakers into a multibillion-dollar business. But as with so many things, the pandemic changed the market in new and surprising ways.
Suddenly, home-bound collectors and day-traders were flipping Nikes and Adidas. Many used dozens of different credit cards to finance their purchases and prices soared.
Sneaker Prices Soar
Prices for Air Jordan 4 and Nike Air Max sneakers have risen 104% and 44% since January 2020
Source: StockX
Malekzadeh rode this resale market to improbable heights. From his warehouse in Oregon, birthplace of Nike Inc., he offered sought-after kicks at below-market prices even before manufacturers released them.
In truth, prosecutors now say, Malekzadeh was taking orders – and collecting money -- for thousands of sneakers he didn’t have and couldn’t get, at least for prices that made any sort of economic sense.
When customers’ orders didn’t arrive, he bullied and blustered and offered store credit and gift cards that would more than make up the difference, prosecutors say. The ruse kept the scheme afloat even as it enriched certain customers who got in and out before other people.
Zadeh Kicks appeared to be running its operation smoothly in the years leading up to the pandemic-induced demand. That’s when Malekzadeh got in way over his head.
In some ways, it’s remarkable Malekzadeh got as far as he did. His business lacked sophisticated systems to process orders, track inventory and ship the product. Other than his fiancee, who’s also being charged for her part as chief financial officer of Zadeh Kicks, Malekzadeh ran alone. Prosecutors say he falsified over 15 loan applications for more than $15 million in bank financing.
The latest limited-edition Air Jordans, the 11 Cool Grey, appears to have been a step too far.
As Nike prepared to drop the new high-tops last December, Malekzadeh made a move, prosecutors say. Nike was pricing the 11 Cool Grey – nubuck upper, grey patent-leather mudguard – at $225.
But Malekzadeh’s company offered to sell them for as little as $115, before the December release date, with the understanding that buyers agreed to take delivery a few weeks after the official drop.
Zadeh Kicks sold 600,000 pairs. It only had 6,000.
Most customers never got the shoes they paid for. Zadeh Kicks, however, pocketed $70 million, prosecutors say.
According to court documents, Malekzadeh spent much of his profits on Bentleys, Ferraris and Lamborghinis. Some $3 million went to Louis Vuitton bags, jewelry, furs and watches as expensive as $600,000 a piece.
So far, the FBI has seized $6.1 million in cash from Malekzadeh, plus watches, as well as about 1,100 pairs of sneakers from his personal collection.
Unable to fulfill orders or refund customers’ money, Zadeh Kicks has since gone under, but according to the court-appointed receiver, its Oregon warehouse still holds 60,000 pairs of sneakers.
Thousands of customers, meantime, are tallying their losses.
Jeremy Rogers, 30, a clinical researcher in Fort Worth, Texas, rattles off his purchase history: 100 pairs of the Air Jordan 11 Cool Grey, 300 pairs Air Jordan 4 Retro Lightning, 225 pairs of the Jordan 4 Retro Military Black, 100 pairs of Jordan 4 Retro Shimmer, 20 pairs of Travis Scott Jordan 1 High Fragment.
In all, he figures he spent $143,000 in sneakers he didn’t receive, spread over 15 credit cards.
But
the ones that he did get, Rogers says he resold for far more than he
bought them. The 100 pairs of Jordan Shimmer sneakers he bought for $160
from Malekzadeh, ended up selling for $315 a piece. He made about
$15,500 on that one sale.
There were also other ways to make money from Malekzadeh, even if orders never arrived. Instead
of refunding customers for undelivered sneakers, Zadeh would offer to
buy back the same pair for cash and gift cards in excess of the amounts
paid by his customers for the sneakers
“I think within three
cycles, I turned $6,000 into $20,000 just cycling through and letting
him buy them back for me or giving me a gift card,” said Rogers, who
calculates he’s ordered about one thousands pairs of sneakers from
Malekzadeh over the past two years.
Despite his ultimate failure, customers and industry watchers still wonder how Malekzadeh sourced so many rare sneakers. The shoes appear to have been legit, not knockoffs. Even so, a review of counterfeit sneakers was among the first things to take place as soon as Malekzadeh dissolved his company.
Rumors floated about him securing shoes from online retailer StockX. Others suspect he’d formed relationships with retailers over the years that helped him get hold of hard-to-get sneakers.
“Is this on the books and legitimate with brands? Hell no,’’ said Matt Halfhill, founder of Nice Kicks, a sneaker blog. Nonetheless, Halfhill suspects the industry often turns a blind eye to such practices, referred to as “backdoor” agreements.
Even some customers suspected something might be amiss.
“There’s no way this guy can sell sneakers for 150 bucks, for something that costs the consumer $250, but guess what?,” said Johnny Liu, who says he bought 400 pairs of sneakers from Malekzadeh’s company. “The order actually came, and they were authentic.”
Still, Liu, who works for an IT company in California, says he’s now out about $70,000.
It’s hard to know how many people have been caught up in the supposed shoe scam. The court-appointed receiver has gotten 3,500 emails from customers who say they’re still waiting for their sneakers.
Those who paid via wire transfers have probably lost their money but customers who used credit cards are trying to recover some of their money by filing chargeback claims through banks or PayPal. A bankruptcy lawyer for Malekzadeh’s company says various options are on the table, including an obvious one: Selling all those sneakers in the warehouse.
Some aren’t waiting. Right after Malekzadeh filed to dissolve his company, angry customers showed up at the Zadeh Kicks warehouse, local media reported. Malekzadeh called the police for help four different times, and one officer asked for backup after reports of a shot fired. According to court documents, Malekzadeh had security cameras installed to safeguard what’s left of his sneaker stash.
